Many Americans Go Broke In Retirement, But Many Gain Wealth In Old Age

April 18, 2018

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While many Americans spend through
their assets in old age, a surprising number have more savings two decades
after retiring than they do when they leave their jobs. The phenomenon is
yet another chapter in the story of old age in the U.S.—which might be titled A
Tale Of Two Retirements.

A new
study by Sudipto Banerjee of the Employee Benefit Research Institute paints
the picture: Over the first 18 years of retirement, about one-third of seniors
in two large national studies increased their assets. This was true even
among those who began with relatively little wealth. Typical older adults who
had less than $500,000 in financial assets at retirement spent about
one-quarter of their nest eggs within the first two decades after getting the
proverbial gold watch—a significant amount but less than many retirement models
predict.

Hanging on to assets

Not surprisingly, Banerjee
found that those who retired with non-housing assets in excess of $500,000 were
more likely to increase their wealth in old age. And he found that those with
old-style defined benefit pensions spent less of their wealth than those
without them.

But a surprising number of
seniors—even those with limited financial resources—held on to their financial
assets, at least for the first couple of decades after retirement. They
apparently did it by reducing their spending to match their income so they did
not have to dip into savings.

Banerjee defined non-housing
assets as stocks, bonds, mutual funds, savings accounts, CDs, housing except
for a primary residence, and the value of automobiles. Wealth was net of debt.
He excluded 401(k)s. Then, he divided retirees into three groups: Those with
less than $200,000 just before retirement, those with $200,000-$500,000, and
those with more than $500,000.

The surprising story

Median assets for the lowest
income group dropped from about $32,000 at retirement to $24,000 after 18
years. That’s a decline of about one-quarter. But here is where the story gets
really interesting: About one in five in this group had only 20%of their assets
remaining after just four years of retirement. No surprise there. But 35%
had more savings after 18 years than when they started.

For those with a moderate
amount of wealth, median assets fell from about $302,000 to $243,000 after 18
years—a decline of about 27%. But here again the average is misleading.
About 16% had only 20% of their assets left after two decades, while 37% had
more than when they retired.

The very old and the very
sick

The highest asset group
started with an average of about $857,000 and still had about $756,000 after
two decades. Among this group, about 12 percent was left with only 20% of their
assets after 18 years, while 35% saw their nest eggs grow after two decades.

Other research confirms
Banerjee’s basic story. But a closer look at spending patterns in old age helps
explain why some seniors in all wealth groups increase assets in old age while
others spend all their savings and become impoverished: the need for high
levels of medical and long-term care.

In a
separate paper, Banerjee looks at the wide variation of health care costs
(including nursing home expenses) for those aged 70 and older. The average
out-of-pocket cost of care from age 70 to death is about $27,000. But the cost
for the top 10% is $172,000 and the top 5% is $269,000.

In this study, Banerjee is
looking at a slightly different population (age 70 to death instead of the
first two decades after retirement) and costs for the very old are higher than
even those in their early 80s. But the basic message remains: While average
out-of-pocket health care costs are manageable for even middle- income seniors,
the relatively few with high medical costs easily can be ruined by the expense.

A 2015 paper by
Jim Poterba, Steven Venti, and David Wise for the National Bureau of
Economic Research also looked at the changes in financial assets of those aged
70 and older. They found savings were typically very stable: Those who were
poor before they retired tended to die poor. Those with substantial assets at
age 70 died with significant amounts of wealth.

A more complex story

But there were two
exceptions: Those who lived to a very old age (90 or older) spent more of their
resources in their last years. And those who either divorced or suffered
adverse health events, such as strokes, were more likely to run out of money.

It is common for
progressives to focus on those older adults who outlive their assets,
while many conservatives point to data that show average savings and costs in
old age and conclude there is no “retirement savings crisis.” This important
research tells a more complicated story: While a surprising number of seniors
hold on to their assets in the first years after retirement, some—especially
those who have few assets to begin with, live a long time in old age, or
who suffer from serious illness—will indeed become impoverished.